Ponzi schemes are an enduring kind of fraud, one of whose many attractions for people looking to make money on other people’s backs is that they can be applied to any industry. The more popular the industry, the easier it is to swindle gullible investors, as a Texas case with a fraudulent frac sand company has recently revealed.
This week, a federal grand jury indicted Texas Democrat Senator Carlos Uresti on 11 charges, including wire fraud, money laundering, securities fraud, and engagement in monetary transactions with property from specified unlawful activity. For all these, Uresti could get around two centuries in prison.
Uresti—who’s pleading not guilty, unlike the managers of the Ponzi scheme company he worked for—worked as legal advisor to Four Winds Logistics, a frac sand trader. His job, according to the charges, was to lure in investors in exchange for a share of the money flowing in. Four Winds Logistics subsequently went under, owing its investors $14 million. Part of the money went to Uresti in the form of shares, a commission for bringing in an investor, and a US$40,000 loan.
Four senior managers of the company were also indicted, and three have already pleaded guilty. The charges against them focus on book-cooking: one investor testified that he was shown a bank account with a balance of more than US$18.8 million, while in fact bank records revealed that over the period under scrutiny, the bank account never had more than US$1.4 million in it.
A stinky affair however one looks at it, but an affair that highlights the prominence of the frac sand business, which has been somewhat overshadowed by the rise and fall of shale producers.
Frac sand miners and traders experienced their own rise alongside shale boomers because without them, there would have been no shale boom. Frac sand is a proppant: a means of keeping oil and gas-bearing rock pores open, so the hydrocarbons can flow out. Use of proppants increased in tune with shale output growth, and then fell as the 2014 price crash began. It is possible that besides Ponzi scheme practices, Four Winds went under thanks to the crash as well. Related: Oil Prices Rise As Most OPEC Members Back Deal Extension
Now that prices have stabilized, frac sand producers are seeing fast demand improvement. In fact, there is already a shortage of frac sand in the shale patch as E&Ps drill much longer horizontal wells and frack more locations within a well¬—mega-fracs. These production enhancement tactics have increased demand for frac sand substantially—up to 10 times the previous peak of the shale revolution. The frac sand industry has taken up the tune, expanding as fast as possible.
Can the future see more Ponzi schemes in this segment of the oil and gas industry? It’s not unthinkable but the fate of the Four Winds management team and that of Senator Uresti suggests that future fraudsters will have to be extra careful if they want to replicate what they did. Or millionaire hopefuls can just stick to real frac sand trading – it is a blooming industry, after all.
By Irina Slav for Oilprice.com
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